The economics of mining Bitcoin

Cryptocurrency has been getting a lot of attention in mainstream media lately, leading to a large influx of people wanting to get in on the action. As a co-founder of a cryptocurrency index fund, a blockchain developer and a Bitcoin miner, I have a little advice for those folks who are new to the scene and want to ride Bitcoin's coattails. I'm purposely targeting Bitcoin mining, ignoring other — possibly more profitable or easy to mine —currencies. However, most of the challenges and calculations I'm introducing in this article will apply to altcoins as well.

Challenges

First off, mining Bitcoin is best done using an ASIC. ASIC stands for "Application-Specific Integrated Circuit" which is not a term you need to understand. ASICs are essentially computers that only exist to perform a single task. Because they're specifically made for one task, they do that task a lot more efficiently than other hardware, like GPU miners. However, ASICs are expensive so expect to spend at least $1500 on your hardware.

Secondly, you need to think about power usage. Running an ASIC is like running a tanning bed 24 hours a day. This means your profitability entirely depends on how much you pay for electricity. If you live in a country where electricity is heavily taxed, you might want to look for a different hobby. However, if you live in a country like Iceland, where electricity is nearly free, you've got perfect conditions to make actual money from Bitcoin mining. Even if you pay only $0.10/kwh (which is low), expect to pay about a hundred dollars extra for electricity every month.

Your third challenge is location. ASICs are loud and need to be kept in a cool location. This was the biggest thing keeping me from setting up my own Bitcoin mine. If we take the one ASIC I would actually buy — the Antminer S9 — we would be living with a sound similar to a vacuum cleaner for 24 hours a day, 7 days a week. That's loud and annoying, meaning you probably don't want it in your own house. If you have a location where you can put the mining rig(s) without them bothering you, that's worth considering. The sound has a purpose however, because most of it is coming from the fans which are keeping your investment cool.

Lastly, you need to be warned. Bitcoin is volatile and while it's done very well in the last year, that is no promise for the future. The Bitcoin price might drop, making your mining operation worthless. Technically you could still use your ASICs for other purposes but you're not going to be making real money from them anymore if they're not mining. Every Crypto investment is an investment in a small, volatile market with high risks. Fortunately, the crypto market can be a ridiculously lucrative one as well.

Variables

The amount of money you'll be making from your Bitcoin mining depends on a few variables (besides electricity usage and cost):

Hash rate

Your hash rate is how many calculations you can do every second. The more efficient your miner, the more calculations you can do. This is your horsepower. This is the only variable you have impact on.

Bitcoin price

The Bitcoin price has a tendency to rise and fall but is in an upward trend overall. You're rewarded bitcoins from your mining. The higher the value, the higher the payout. You have no control over this and are just left to the open market's strange volatility.

Bitcoin mining difficulty

Difficulty decides how hard it is to find a Bitcoin block. This is adjusted every two weeks but tends to rise with the price. At some point however, the difficulty will most likely be too high for the value of a Bitcoin. You have no control over this but it does have a lot of direct impact on your profitability.

Pool cut

Mining alone is almost never worth it so I suggest mining for a Bitcoin mining pool. I won't vouch for any but there are plenty large ones you can easily join. Normally, these pools take a small cut from your mined Bitcoins. You have some control over this in the sense that you can choose a different pool but pools tend to have static fees.

Making money

I've told you the challenges you'll face mining Bitcoin, I've told you which variables matter, now I'll give you a quick way to calculate if mining bitcoin is worth it for you. Normally, I prefer to create my own scripts to calculate the profitability of business plans or investments — and I have a large excel sheet that does exactly this — but for a simple Bitcoin mining operation, there are many sites you can use.

One of the sites I really like using is Coinwarz, where you can simply input your variables and get an overview of the money you can be making. There are many sites like Coinwarz but it's the one I used to check my own math.

When you do start making Bitcoins, you still might want to make actual dollars. In my opinion, you should hold your Bitcoin as I believe the price will only rise but I understand if you just want to have money on your bank account. A good way to do that is by selling your Bitcoins on an exchange like Coinbase. Coinbase is quite easy to use but it's worth reading up on how exchanges work before you get into mining.